Wednesday, April 4, 2012

Today's links

Excerpt: The first quarter of 2012 has seen a huge surge in stock prices around the world. Japan’s Nikkei index rose by 20 percent. Britain’s FTSE and Germany’s DAX were both up by more than 14 percent.

In the US, the Dow gained 994 points, its biggest-ever quarterly point gain. The Standard & Poor’s 500 index rose 150 points, likewise posting a record quarterly point gain. In percentage terms, the Dow was up 8 percent, the S&P gained 12 percent (its largest year-on-year increase since 1998), and the Nasdaq soared more than 18 percent, its best first quarter since 1991.

Rising stock prices, however, have long since ceased to provide any real barometer of the underlying health of the economy. Over three decades in which financial speculation has increasingly come to dominate the economic activity of the ruling elite, the financial markets have become a mechanism for funneling an ever greater share of the social wealth into the private bank accounts and investment portfolios of the rich and the super-rich.

The current market boom takes place within the context of economic contraction in Europe, declining growth rates in China and India, and an expansion of gross domestic product in the US that is, by the standards of previous post-recession recoveries, anemic. There are no signs in the US and most of Europe of any genuine recovery in production or productive investment in the fourth year of the deepest economic crisis since the Great Depression.

Behind the headline figures, there are many signs that the current stock boom is fragile and unsustainable. What, then, is driving the current rally?

It is in large part a reflection of the response within the corporate-financial elite to the success, to this point, of its drive to impose the full burden of the capitalist crisis on the international working class. This goes hand in hand with the transfer of trillions more in public funds to shore up the banks, to be paid for through even more ruthless attacks on jobs, wages, pensions and social services.

The markets are celebrating—short-sightedly—the ability of the European Union, the International Monetary Fund and the European Central Bank to impose mass poverty on the Greek working class and engineer a controlled default of the country without sparking a new Lehman Brothers-style financial meltdown. They are also heartened by the European Union fiscal pact, which commits all EU governments to permanent and severe austerity.

Meanwhile, the European Central Bank has come to the rescue of the European banks by pumping a trillion euros of virtually interest-free loans into their coffers, and the Federal Reserve has assured the markets that it will continue to hold US interest rates to near-zero for at least another year-and-a-half.

On this basis of unlimited and virtually free credit and the destruction of working class living standards, the ruling classes in the US and other major economies are implementing an economic model for boosting corporate profits on the basis of far lower levels of production. The standard has been set by the American auto companies. On the basis of a 50 percent cut in the wages of newly hired workers—imposed under the Obama administration’s 2009 auto bailout, with the enthusiastic support of the United Auto Workers union—the Big Three last year returned to profitability on far lower sales volume than prior to the recession. General Motors registered its biggest yearly profit ever....

The imposition of wage and benefit cuts has brought about unprecedented gains in corporate profits, which surged 8.5 percent to $1.58 trillion in the United States last year. Corporate profits have reached 10 percent of gross domestic product, the highest level in the entire postwar period.

These policies have resulted in an even more drastic concentration of wealth in the hands of the super-rich. CEO pay in the US set a new record in 2011, climbing a further 2 percent to a median of $9.6 million for Fortune 500 companies. The top 25 global hedge fund managers took home $14.4 billion in 2011, or $576 million apiece.

All of the gains in US national income in 2010 went to the top 10 percent, with the top 0.01 percent, 15,000 households, accounting for more than a third of the national gain.

A “recovery” based on such naked plunder can only be fleeting. The underlying contradictions that led to the crisis have only been compounded by the policies of the ruling elite.

Meanwhile, the continual drive by the ruling class to impoverish the world’s population can only lead to renewed social struggles. The eruptions of 2011 were a precursor to far broader upheavals. The massive response to last week’s general strike call in Spain is an indication of the emerging class struggles.

The experiences of 2011 and the beginning of 2012 underscore the critical issue of leadership and perspective. The new, revolutionary leadership of the working class must be built to unite the coming struggles on the basis of a socialist and internationalist program.

Excerpt: ...These orthodoxies ultimately cost Bruning his office in May 1932 and paved the way for the Nazis – who ran an election platform that decried every tenet of the gold standard’s orthodoxies – to become the largest party in the Reichstag with 230 seats, and for Adolf Hitler to become chancellor in January 1933.

Hitler’s objectives of higher employment and rearmament were left to the President of the Reichsbank, Hjalmar Schacht, to achieve, who violated all economic orthodoxies of the time to meet those ends.

Schacht turned Germany into a closed economy with strict import controls and deficit spending by the government was financed by printing money. To anchor fears of inflation Schacht continued with the policy of keeping the mark officially on the gold standard. Although, technically, the mark remained off the standard during the 1930s as exchange controls remained in place and there was no gold left to back reichsmarks.

Fiscal stimulus worked (see Cohn, 1992). Unemployment fell from 6 million in 1932 to less than 500,000 by 1938, real GDP and industrial production doubled, and prices stopped falling. “It was a [skillful] experiment in what would come to be known as Keynesian economics before Keynes had

elaborated his ideas.”26 In the words of another observer “Hitler had found a cure against unemployment well before Keynes finished explaining it”.27

Breaking with the orthodoxies of the gold standard was instrumental in Germany’s recovery from depression, but this was ultimately forced by markets and desperate circumstances. The decisions to abandon orthodoxies were made on political grounds.

Excerpt: We do know that more jobs are being created," said Reich, professor of public policy of the University of California at Berkeley. "The problem is that the actual labor participation rate, the ratio of people who are in the labor force relative to the people who are eligible to work, it's down to almost the lowest point it was during the great recession. We haven't seen much pickup in that." In February, it stood at 63.9 percent, which was down from 64.2 percent in February 2011, and significantly below the 66 percent levels of 2006 and 2007.

In addition, while the economy has been expanding for nearly three years and hiring is picking up, Reich notes, "we also see some major declines in terms of median wage. And that's particularly true for the bottom 90 percent."

In the past, economists argued that wage growth lagged in part because employers were spending more on benefits like health care and pensions. But that hasn't been the case in the past few years. A recently released study from the National Institute for Health Care Reform shows that in 2010, the percentage of Americans with insurance who got insurance from employers fell to 53.5 percent, down sharply from 63.6 percent in 2007. "At the top of the talent chain, employers are providing very generous health insurance, deferred compensation, and everything you can imagine," notes Reich. "But as you go down the job ladder, particularly to people who are doing routine jobs, they're getting less and less. There has been a substantial erosion of health care benefits for the bottom 90 percent.

Excerpt: The U.S. once again may be emerging as a main engine for global growth -- and at an opportune time, as Europe slides into recession and China’s economy decelerates.

An improving job market, rising stock prices and easier credit are combining to lift U.S. consumer confidence and spending, with optimism measured by the Bloomberg Comfort Index near a four-year high. Personal-consumption expenditures increased by the most in seven months in February, rising 0.8 percent, the Commerce Department said last week.

“We’re entering a sweet spot for the economy,” said Allen Sinai, president of Decision Economics Inc. in New York. “We’re in a self-reinforcing cycle,” where faster employment growth leads to higher household income and increased consumer spending....

Household Spending

U.S. households spent $10.7 trillion in 2011, accounting for about 70 percent of GDP, according to the Commerce Department. That’s more than China’s total GDP of $7 trillion last year, based on International Monetary Fund figures.

Excerpt: A post at CNNMoney's Term Sheet blog, "Why Dollar Stores Are Thriving, Even Post-Recession," maintains that there is more to the recent success of the U.S. dollar store industry -- including the big three, Dollar General (DG) , Dollar Tree (DLTR), and Family Dollar (FDO) -- than meeting the needs of cash-strapped consumers.

The optimists better hope that is correct. Because if it isn't, history suggests the continued strength in the group is a sign that Americans are becoming more economically worse off than they were, and that any talk of a "recovery" is sorely misguided.

As the following chart shows, the sector (I've used Family Dollar's share price as a proxy for the group) has loosely tracked the inverse of year-on-year changes in U.S. average hourly earnings over the past 12 or so years, which, given the recent run-up in the stock, would seem to indicate that wage growth -- and, hence, spending power -- is completely stalling out. (See chart)

So, rather than assuming, as the writer of the Term Sheet post and countless U.S. stock investors do, that the worst is behind us, the reality may be altogether different.

Excerpt: The Federal Reserve is holding off on increasing monetary accommodation unless the U.S. economic expansion falters or prices rise at a rate slower than its 2 percent target.

“A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below” 2 percent, according to minutes of their March 13 meeting released today in Washington...

“I would have to see some pretty severe circumstances before I endorse for another round of quantitative easing,” Atlanta Fed President Dennis Lockhart said today on Bloomberg Radio’s “Hays Advantage” with Kathleen Hays. “The outlook is positive enough that I am not sure I see the need for it.”

Six Peers

Yields on 10-year Treasury notes headed for the biggest gain since March 14, jumping 8 basis points to 2.27 percent. The Dollar Index, a gauge of the currency against six major peers, rose 0.7 percent. Gold for May delivery dropped 2.2 percent to $1,641.50 an ounce.

Markets reacted sharply because investors expected a signal for new rounds of quantitative easing, said Michael Gapen, a former Fed economist who is a senior U.S. economist at Barclays Capital Inc. in New York.

“There were others who were convinced the Fed was going to have to do it and some QE was still priced in,” Gapen said. Today’s minutes don’t “rule out QE3 - the Fed still thinks there are downside risks to remain concerned about -- but the trends right now don’t suggest they need to do more,” he said.

Excerpt: Recall when yours truly attended Americatalyst, a real housing/mortgage nerd conference last November, and the panel that was asked to forecast housing had no one predicting more than a 2-3% decline? I was gobsmacked because no one seemed to be acknowledging the huge number of foreclosures in process plus those likely to happen (“shadow inventory”).

Moody’s has focused on one aspect of the issue and does not like what it sees. Recall this Moody’s forecast follows one from Fitch of an 8% to 10% decline in housing prices. From Bloomberg:

Sales of repossessed properties probably will rise 25 percent this year from 1 million in 2011, according to Moody’s Analytics Inc. Prices for the homes could drop as much as 10 percent because they deteriorated as they were held in reserve during investigations by state officials resolved in February, according to RealtyTrac Inc. That month, 43 percent of foreclosures were delinquent for two or more years, from a 21 percent share in 2010, according to Lender Processing Services Inc. in Jacksonville, Florida.

Prices for repossessed properties could drop as much as 10 percent because they deteriorated as they were held in reserve during investigations by state officials resolved in February, according to RealtyTrac Inc.

“The longer a foreclosed home is in the mill, the bigger the losses,” said Todd Sherer, who manages distressed mortgage investments for Dalton Investments LLC, a Los Angeles-based hedge fund that oversees $1.5 billion. “We have a bulge of these properties coming through the system.”

Homes stockpiled less than a year sell for about 35 percent below the value set by lenders, according to a March 15 report by the Federal Reserve Bank of Cleveland. At two years, the loss is close to 60 percent. A surge of cheap foreclosures may erode prices in the broader real estate market, even as the economy expands and residential building increases, said Karl Case, one of the creators of the S&P/Case-Shiller home-price index.

Yves here. Note this view is based simply on the notion that foreclosures were attenuated on 1.25 million houses, allegedly due to banks keeping them off the market due to the robosiging crisis. By contrast, top housing analyst Laurie Goodman estimates the amount of shadow inventory at between 8 and 10 million homes, and our Michael Olenick, using a different methodology, comes in at just under 9 million homes.

Moreover, evidence on the ground suggests that the banks had reasons other than the robosigning scandal for drawing out foreclosures. While NEW foreclosure actions slowed down markedly, and have ramped up again in the wake of the settlement, it looked far more likely that banks were attenuating foreclosures to maximize income . The longer a house in delinquent and then in the foreclosure process, the more the bank can collect in late fees and servicing fees. And there is considerable evidence that banks pile junk fees on top of that, for instance, double charging the borrower and the trust for fees like broker price opinions.

In Florida and other states, there are numerous cases where the bank has completed all the steps in the foreclosure but has not take possession of the house to sell it. That sort of behavior has nothing to do with robosigning and presumably has to do with bank economics (as in it has a second lien it would have to write off when the home is liquidated).

In other words, there is good reason to believe the Moody’s estimate of homes that will hit the market over time is considerably understated, unless the banks plan to keep a lot of houses zombified. Stay tuned.